Crawford School of Public Policy TTPI Tax and Transfer Policy Institute

Tax and energy

TTPI – Policy Brief 2/2020 May 2020

Maria Sandoval-Guzman PhD Candidate Curtin University

Miranda Stewart Professor, University of Melbourne Fellow, Tax and Transfer Policy Institute Australian National University

Tax and Transfer Policy Institute Crawford School of Public Policy College of Asia and the Pacific +61 2 6125 9318 [email protected]

The Australian National University Canberra ACT 0200 Australia www.anu.edu.au CRICOS Provider No. 00120C

* This Policy Brief is based on work commissioned by the Australian Conservation Foundation (ACF). The work is independent research and the options and recommendations do not necessarily reflect the views of the ACF.

THE AUSTRALIAN NATIONAL UNIVERSITY Policy Brief - Tax and Energy

This policy brief discusses tax and the or discourage wasteful or sustainable production and consumption of energy. The behaviour. Tax rules may distort price brief outlines elements in the Australian tax signals and contribute to the externalisation system that may affect incentives for of costs, which are ultimately borne by the production of polluting or non-renewable environment and society. energy sources (such as coal, oil and gas), Under current policy settings, rather than clean, or renewable, energy environmental taxes in Australia are borne sources. The brief then discusses the largely by households. Environmental taxes elements of the tax system that may affect include, most importantly, fuel excise on the consumption of energy, especially the crude oil and liquefied petroleum gas (LPG), incentives or disincentives for households which raised $18.4 billion in 2016-17; stamp and businesses for excessive energy duty on vehicle registration and other motor consumption and that may discourage vehicle taxes raising $10.3 billion in 2016- transition to the consumption of renewable 17; renewable energy certificates and the energy. luxury car tax. Figure 1 shows that in all The tax system is a powerful driver of years, from 2010-11, households bore Australia’s economy. Taxation can change between 24% to 35% of these taxes, while the price of a good or service making it more agriculture, mining, manufacturing and the or less financially attractive to consumers electricity sectors bore lower proportions. and investors. It can shift a market to prefer one technology or another especially if they are directly substitutable. It can encourage Figure 1. Environmentally-related taxes paid by industry and households, energy taxes, share of total, 2010-11 to 2016-17 (a)

40

35

30

25

20 Percent 15

10

5

0 Agriculture, Mining Manufacturing Electricity, gas, Transport, Other industries Households forestry and water and waste postal and fishing services warehousing

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Own construction. Source: Australian Bureau of Statistics, Australian Environmental-Economic Accounts 2019. (a) Includes Excise on Crude oil and LPG, Carbon pricing mechanism, Renewable energy certificates, Energy Savings Scheme, Greenhouse Gas Reduction Scheme, The Queensland Gas Scheme, The Retailer Energy Efficiency Scheme and Victorian Energy Efficiency Target scheme.

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Policy Brief - Tax and Energy

Figure 1 also shows the effect of the Carbon down the cost of production and Pricing Scheme during 2012-13 and 2013- consumption of renewable energy sources 14 in helping to shift some of the tax burden for households and businesses, in a way from households towards industry, that is efficient, equitable and sustainable. particularly electricity, manufacturing and mining. SUMMARY OF POLICY OPTIONS Resistance to energy transition out of coal, Policy option 1. Introduce accelerated mining and gas into renewable sources is depreciation or investment allowance to often based on arguments in support of support upgrade of plant and equipment to sectoral employment. Government assets that meet specified energy efficiency expenditure could be redirected away from goals. tax subsidies for fossil fuels, such as accelerated depreciation for polluting heavy Policy option 2. Wind back accelerated vehicles or equipment, or fuel subsidies, depreciation for fuel-consuming and towards transitional job support, retraining producing heavy equipment, and reduce schemes and strengthened regional immediate capital deductions for mining and industries in renewables. This can be a use of fossil fuels. successful, people-focused mechanism in Policy option 3. Strengthen concessional Australia’s transition towards greener finance for clean technologies. energy production, with the International Renewable Energy Agency (2020) Policy option 4. Explore an income tax identifying the potential for 220,000 new deduction or offset to incentivise home jobs to be created in Oceania in the next owners or businesses to invest in three decades. This transition will also help equipment that utilises renewable energy or economic resilience. Due to COVID-19, the is more energy efficient. International Energy Agency (2020) finds Policy option 5. Explore an income tax that energy demand has contracted by 6%, deduction or offset to incentivise landlords the largest reduction in 70 years in to upgrade to renewable-energy based or percentage and the largest ever in absolute energy efficient equipment. terms, especially affecting oil, coal, gas and nuclear energy; only renewables posted Policy option 6. Explore a stamp duty growth in demand and this is expected to concession for homes with higher energy increase further. The Australian Energy efficiency (star ratings). Market Operator (2020) estimates that the Policy option 7. Explore federal or State National Energy Market could be operated tax concession for equipment used to securely with 75% of energy originating charge electric vehicles. from wind and solar by 2025. Policy option 8. Explore federal or State Policy options addressing tax and energy tax concession for use of public transport should be addressed to both production and and remove income tax and Fringe Benefits consumption. This brief presents some Tax concessions for cars. policy options as a dual strategy, seeking to change pricing and incentives towards more Policy option 9. Increase GST on non- neutral or more environmentally aware tax essential personal air travel and goals for both producers and consumers. A international air and sea freight emissions key issue is whether tax reform might bring and waste. TTPI Policy Brief 2/2020 3

Policy Brief - Tax and Energy

TAX AND ENERGY PRODUCTION technology features of capital plant and equipment. Taxpayers may follow the More than 75% of electricity generation in Commissioner’s schedule of depreciation Australia is produced from coal and gas. rates or may choose to depreciate an asset Electricity production from renewable by estimating its effective life as used in that sources in Australia lags significantly business. These income tax rules apply to behind other countries. Although estimates energy producers, as for other businesses. vary, just between 19% (in 2018, Australian Government) to 24% (in 2019, Clean Small businesses are eligible for an ‘instant Energy Council) of the country’s electricity asset write-off’ which is an immediate supply comes from renewable energy deduction for plant and equipment. This is a sources including wind, solar and generous concession which is not targeted hydropower. In contrast, renewable sources based on energy-reduction or pollution account for close to 40% of electricity prevention goals. It is utilised by many production in Germany and New Zealand businesses to purchase vehicles (four out of and 99% in Norway. This is partly a result of five examples on the ATO website refer to Australia’s geography and economy but is purchase of a motor vehicle). These also a consequence of disincentives in vehicles are mostly fossil-fuel based. economy policy settings, including the tax During the Federal election campaign the system. Australian Labor Party (ALP) proposed to Energy production: Tax depreciation expand accelerated depreciation of plant, and expense deductions equipment and intangibles in its ‘Australian Investment Guarantee’, and to extend Australia’s income tax law is neutral as eligibility to businesses of any size. This between polluting or renewable energy permitted a deduction for 20% of the capital production. The income tax law provides cost of new assets exceeding a cost of general rules for deductions for business $20,000, in the first year of operation. There expenses under Section 8-1 and Section is no targeting towards energy-reduction or 40-730 of the Income Tax Assessment Act pollution prevention assets. Again, this 1997 (ITAA 1997). The income tax law would likely be used by many businesses contains a uniform capital allowance system for purchase of vehicles powered by fossil which applies general depreciation fuels. The estimated fiscal cost of this (deductions) for the cost assets and other measure is about $1.8 billion each year. capital expenditure incurred by businesses or income-producing activity (such as rental There are no special deductions for capital real estate). There are no specific income expenditure on structural improvements or tax rules for energy production in Australia, alterations to a building to use less energy whether from fossil fuels or renewable or to reduce pollution; general rules for sources. building depreciation may apply (Division 43 of ITAA97). There are also no special tax The capital cost of plant and equipment rules to support business investment in used in a business or other income- plant and equipment or other inputs for producing activity is depreciable over the electricity production from renewable effective life of the asset (Division 40 of energy sources. Similarly, the cost of ITAA97). The depreciation rate does not investment in ‘clean’ technology used in a draw distinctions based on pollution business or income-producing activity, such prevention, environmental or clean TTPI Policy Brief 2/2020 4

Policy Brief - Tax and Energy as equipment that will use less energy, or also subsidises the use of these fuel- produce less pollution, is depreciable under consuming assets in the fossil fuel sector, the general rules and attracts no additional relative to the renewable energy sector. tax concession or subsidy relative to more Assets eligible for the ‘capped’ effective life polluting or wasteful equipment. are set out in Table 1. For example, the Accelerated depreciation for some capped effective life for an aeroplane is set polluting plant and equipment by legislation at between 8 to 10 years, even though the Commissioner of Taxation On the other hand, some plant and estimates that an aeroplane may be equipment used in resource-intensive or expected to be in use for 20 years or more. polluting industries is eligible for a ‘capped’ Table 2 shows that certain assets are effective life which provides accelerated eligible for accelerated life only where they depreciation for that plant and equipment. are used in the oil and gas industry or in No environmental criteria apply to this tax agriculture. concession, for example limiting it to more energy efficient equipment; the concession

Table 1. Assets which have a capped effective life regardless of the industry usage

Effective Item Asset life (years) Aeroplane used predominantly for agricultural spraying or agricultural 1 8 dusting 2 Aeroplane to which Item 1 does not apply 10 Helicopter used predominantly for mustering, agricultural spraying or 3 8 agricultural dusting 4 Helicopter to which Item 3 does not apply 10 5 Bus with a gross vehicle mass of more than 3.5 tonnes 7.5 Light commercial vehicle with a carrying capacity of one tonne or 6 greater and a gross vehicle mass of 3.5 tonnes or less (including 7.5 utilities, vans, and light trucks) Minibuses with a gross vehicle mass of 3.5 tonnes or less and seats 7 7.5 for 9 or more passengers 8 Trailers with a gross vehicle mass greater than 4.5 tonnes 10 Truck with a gross vehicle mass greater than 3.5 tonnes (other than a truck that is used in mining operations and that is not of a kind that 9 7.5 can be registered to be driven on a public road in the place in which the truck is operated) Vessel for which you have a certificate under Part 2 of the Shipping 10 10 Reform (Tax Incentives) Act 2012

Source: Section 40-102 of ITAA97.

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Table 2. Assets which have a capped effective life where used in the specified industry

Effective Item Asset Industry life (years) 1 Gas transmission asset Gas supply 20 2 Gas distribution asset Gas supply 20 Oil production asset (other than an electricity Oil and gas 3 15 generation asset or an offshore platform) extraction Gas production asset (other than an electricity Oil and gas 4 15 generation asset or an offshore platform) extraction Oil and gas 5 Offshore platform 20 extraction Asset (other than an electricity generation asset) used to manufacture condensate, crude oil, domestic gas, Petroleum 6 15 liquid natural gas or liquid petroleum gas but not if refining manufacture occurs in oil refinery Primary 7 Harvester 6 2/3 production Primary 8 Tractor 6 2/3 production

Source: Section 40-102 of ITAA97.

Fossil fuels: coal, oil and gas • immediate deduction for expenditure extraction which does not form part of the cost of a depreciating asset, The income tax law provides special rules • immediate deduction for payments of for mining and resource extraction petroleum resource rent tax and for businesses in Australia. These include an expenditure that does not form part of immediate deduction for minerals the cost of a depreciating asset (see exploration expenditure and capital Taxation Ruling TR 2017/1), allowances for the cost of the production • farm-in farm-out arrangements and transport of coal, oil and gas. Plant and (outlined in Miscellaneous Tax equipment for resource extraction Rulings MT 2012/1 and MT 2012/2), businesses is treated the same as for other • deduction over time for capital businesses. Capital cost of coal mining and expenditure associated with projects transport is deductible in a project pool over carried on (project pools). the life of the project. As shown in Table 2, certain assets used in Deductions for the decline in value of the oil and gas sector benefit from depreciating assets are worked out through accelerated depreciation which is a tax the general rules, except when it concerns subsidy for the sector. depreciating assets or capital expenditure deductions under the following concepts: Low or nil taxation on fuel inputs • immediate deduction for depreciating As reported in an OECD country note on assets used in exploration or energy taxation in Australia (OECD 2019), prospecting, fuels used for energy transformation,

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Policy Brief - Tax and Energy including production of liquefied petroleum energy targets. This measure goes hand in gas (LPG) or natural gas, and coal and coke hand with policy option 1, since an consumption are not subject to fuel taxation incremental approach may be more feasible (see further Policy Brief 1). for initiating change. Additionally, these policy options need to work as a dual Fossil fuels used to generate electricity strategy because removing tax deductions benefit from a full rebate of excise. This –or increasing taxes– in the production of means that only some oil products used in energy from traditional sources without the residential sector are taxed. Coal, which providing a (renewable) substitute will likely accounts for most use and carbon lead to higher prices being transferred onto emissions from energy use in this sector, is consumers, instead of effectively changing not subject to a fuel excise. Electricity output production patterns. is also untaxed. Fuel taxes are fully refunded for industrial and commercial Renewable Energy Target: Large users, including agriculture and fishing. scale production Policy options Australia’s Renewable Energy Target (RET) scheme is not a tax measure, but a Policy option 1. Introduce accelerated regulatory regime which operates through depreciation or investment allowance to Clean Energy Regulator-issued certificates, support upgrade of plant and equipment which provide a financial incentive through to assets that meet specified energy a price mechanism. efficiency goals Accelerated depreciation or expensing The Large-scale Renewable Energy Target deductions could be provided for (LRET) aims to create a financial incentive expenditure on energy efficient assets by for the establishment or expansion of income-producing businesses. For renewable energy power stations, such as instance, even if economically an asset that wind and solar farms or hydro-electric is energy efficient or relies on renewable power stations. It does this by legislating energy has a useful life of 20 years, an demand for Large-scale Generation accelerated schedule which permitted Certificates (LGCs). One LGC can be depreciation over a shorter time frame created for each megawatt-hour of eligible would allow for greater tax deduction in renewable electricity produced by an early years, incentivising this capital accredited renewable power station. LGCs expenditure. can be sold to entities (mainly electricity retailers) who surrender them annually to Policy option 2. Wind back accelerated the Clean Energy Regulator to demonstrate depreciation for fuel-consuming and their compliance with the RET scheme’s producing heavy equipment, and reduce annual targets. The revenue earned by the immediate capital deductions for mining power station for the sale of LGCs is and use of fossil fuels additional to that received for the sale of the Current capped effective life assets, the electricity generated. depreciation concessions for small A 100% exemption from RET liability is business and proposals such as the 2019 applied to electricity used in carrying out Australian Investment Guarantee (ALP) eligible emissions-intensive trade-exposed could be reviewed and may be focused on (EITE) activities. Companies that conduct energy efficient outcomes, or renewable an eligible EITE activity may be issued with TTPI Policy Brief 2/2020 7

Policy Brief - Tax and Energy an exemption certificate by the Clean strategy towards increased use of Energy Regulator. renewables.

Policy options The Small Scale Renewable Energy Scheme (SRES) creates a financial Policy option 3. Strengthen incentive for households, small businesses concessional finance for clean and community groups to install eligible technologies small-scale renewable energy systems. It Given Australia’s reliance on traditional does this by legislating demand for Small- sources of energy, new options scale Technology Certificates (STCs). implemented by oil-dependent emerging STCs are created for these systems at the economies, such as concessional finance time of installation, according to the amount for clean technologies, could be of electricity they are expected to produce increasingly helpful to shift market inertia. A or displace in the future. For example, the 2019 report, ‘Clean technology fund and SRES allows eligible solar photovoltaic (PV) concessional finance: Lessons learned and systems to create, at the time of installation, strategies moving forward’ pinpoints how STCs equivalent to the expected system concessional finance can make wind, solar, output between the time of installation and and batteries cost-competitive at a faster the end of the RET scheme in 2030. pace, accelerating the shift from fossil- Small scale renewable systems which may fuelled power. In Australia, this falls within be eligible for certificates include: the scope of the Clean Energy Finance Corporation (CEFC) and the Australian • solar photovoltaic panels, Renewable Energy Agency (ARENA), • wind turbines, driving investment towards key alternative • hydro systems, technologies. • solar water heaters, and Renewable Energy Target: Small • air source heat pumps. scale production and related RET-liable entities with an obligation under consumption the LRET also have a legal requirement Importantly, a significant part of renewable under the SRES to buy STCs and surrender energy production comes from small them to the Clean Energy Regulator on a systems owned by Australian families and quarterly basis. While it is possible for businesses. The Department of Industry, owners of renewable energy systems to Science, Energy and Resources notes that, create and sell the STCs themselves, in as at 31 March 2020 there were more than practice, installers of these systems usually 3.6 million small-scale renewable offer a discount on the price of an installations in Australia, including more installation, or a cash payment, in return for than 2.37 million rooftop solar power the right to create the STCs. systems, more than 1.23 million solar and Solar feed-in tariffs heat pump water heaters, 424 wind systems and 18 hydro systems. As such, addressing Solar feed-in tariffs for household-produced home-based solar and small-scale solar energy fed into the national electricity renewables from both a production and grid previously operated as a subsidy in a consumption perspective is a key part in the number of States and Territories. That is, the feed-in tariffs for excess solar energy

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Policy Brief - Tax and Energy produced were greater than the prices The 2015 review of the ACT’s rooftop solar received by large-scale generation. These scheme found that the scheme fulfilled its feed-in tariffs have now been substantially objectives and contributed to a significant reduced. increase in the uptake of rooftop solar in the ACT, but the subsidised tariffs were For example, in the ACT, the Feed-in Tariff regressive between households. CSIRO’s scheme (a 20-year scheme from date of statistical analysis of aggregate South-East connection) stopped intakes in July 2011 Queensland and Australia wide energy data (ending on 2036); currently, a non- (2017) revealed that higher energy users government buyback scheme is available tended to be those in the higher income from supplier ActewAGL. Small-scale brackets, those owning their own property systems in the ACT at the time of and those in large separate houses. introduction of the program were eligible to apply for a rate of 50.05c/kWh –almost 12 The design and implementation of future times the annual volume weighted average household renewable energy schemes spot prices in the same year. In Victoria, a through positive incentives or subsidies premium feed-in tariff closed in 2011 requires an assessment of the price and (ending in 2024) and customers on the income elasticity of Australian energy users current scheme receive either a single-rate – that is, whether changes in price lead to minimum feed-in tariff of 12 cents per different quantities being supplied or kilowatt hour (c/kWh) or a time-varying demanded, and if changes in income alter feed-in tariff. A 12 cent feed-in tariff, for the consumption behaviour of households. instance, is consistent with Victoria’s annual A review of electricity use and income by the volume weighted average spot prices California Public Utilities Commission, for received by a large-scale electricity instance, found different elasticity results generator in 2018-19. internationally and across regions within the United States. A distributional analysis Schemes of this kind operate as cross- would also be needed, relative to other subsidies, where the electricity retailer is options to support renewable energy effectively required to purchase small-scale production and consumption, or electricity above the wholesale price. These compensation payments would be required subsidies are not government expenditure, for low-income households who cannot but rather operate as a regulatory benefit from the feed-in tariff. redistributional mechanism. The cost is passed onto other customers; this may In March 2019, the Treasurer announced a include lower-income households or renters one-off energy payment of $75 for singles who cannot benefit from such schemes and $125 for eligible couples receiving because they cannot afford the capital costs government payments, exempt from of installing solar. It is important to note, income tax and paid automatically before however, that ‘green scheme’ costs are the the end of the financial year. However, this smallest component of an average type of incentive does not address the residential customer bill across the National underlying issue of high energy prices, nor Electricity Market, at 6% –and lower than does it prompt behavioural change from the retail margin, which is estimated at 8% households or consumers, so it is not an (excludes GST; ACCC 2018, p. 5). effective, long-term strategy.

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Policy Brief - Tax and Energy

A recent option to create sustainable energy remote communities. Establishment and networks is development of community evaluation of pilot projects would be a solar microgrids, which allow communities valuable input to policy decision-making to generate, store, and transact energy based on these feasibility studies. locally for household, business and electric- vehicle use, leading to more efficient, TAX AND ENERGY resilient and sustainable electricity CONSUMPTION production. An Australian example is the Microgrid Demonstration Initiative in Most electricity consumption in Australia is Victoria. Measures of this type could still reliant on fossil fuels. Most households improve energy security and resilience in in Australia used mains electricity as a regional Australia. The Government in source of energy (ABS 2014). One half of Budget 2019-20 introduced a new budget households (50%) used mains gas, one in allocation for supporting reliable energy five households used solar energy (20%), infrastructure. This includes $50.4 million to one in five households used LPG/bottled support feasibility studies into the gas (20%), and 14% of households used development of microgrids in regional and another source of energy. Figure 2. Energy use of Australian households

45 40 40 35 33 30

25 21 20

Percentage 15

10 6 5 0 Heating and cooling Appliances and Water heating Lighting equipment (incl. refrigeration and cooking)

Own construction. Source: Australian Government, Your Home: Australia’s guide to environmentally sustainable homes. As Figure 2 shows, in the average Australia does not have special tax rules to Australian home, energy is used for three address incentives for reducing energy main functions: heating and cooling (40% consumption or for adoption of energy- of household energy use), appliances efficient plant, equipment and transport, for (33%), and hot water service (21%). businesses or households. Private Appliances account for almost half of the consumers are not entitled to deductions or greenhouse gas emissions in an average tax subsidies on capital costs (buildings, Australian home and the largest single plant or equipment) used for their own source of emissions are hot water systems consumption or enjoyment, such as in their (22% of a household’s emissions). In own home. particular, electric water heaters contribute to these high emissions. TTPI Policy Brief 2/2020 10

Policy Brief - Tax and Energy

This is a timely opportunity to evaluate the (over 15 years) than gas or electric hot uptake of renewables: due to increasing water systems (over 12 years). Solar- electricity prices, renewables become powered generating system assets are comparatively more economic than in depreciable over a period of 20 years. The previous years. Additionally, use of gas cost of water pumps is depreciable over 20 systems relative to electricity (the two main years and water tanks are capital options used by Australian homes) does improvements depreciable over 40 years. not necessarily lead to greener outcomes: The cost of upgrades for solar photovoltaic although gas can be used as an alternative panels and efficient heating and cooling for to electricity for household use, it cannot be rental properties would be a capital offset by solar (electricity use can be improvement to the property and may be substituted by solar, but gas heating, for depreciable over the plant’s effective life, or instance, cannot). only over the life of the building (40 years). The installation of second-hand equipment Energy efficiency for households is not depreciable. Currently, Australian federal and State In contrast, the cost of repairs to old, governments do not give tax incentives for inefficient or non-renewable systems may households or businesses to purchase and be immediately deductible as a rental use equipment that draws on renewable property expense. This means that energy sources, or is energy-efficient landlords have an incentive to repair old, (although, presumably the households or inefficient systems rather than to upgrade businesses that use energy-efficient to renewable-based or more energy equipment do use less energy and hence efficient ones. benefit from lower costs). State-based regulatory schemes require For homeowners or renters, upgrading of electricity retailers to deliver increased an appliance, such as heating or hot water energy efficiency for customers, partly to systems, to a renewable or energy-efficient achieve this goal. Retailers subsidise the source is not tax deductible. For example, capital cost of conversion or upgrade to there is no tax incentive to support energy efficient products for households, households whether owner-occupied, then recover this cost through charging tenants or landlords, seeking to upgrade higher electricity prices (the Government hot water systems from gas to electric generally does not give tax incentives for powered by or offset by solar. owner-occupiers, rather, this is pursued For landlords, under the current tax through State-based obligation schemes system, the capital cost of installing by providers). For example: systems such as heating, hot water and • The Victorian Energy Upgrades solar panels can be depreciated over time Program provides rebates on energy (ATO Rental Property Guide for 2019). The saving products and upgrades, for cost of these depreciating assets is eligible households and businesses who work to be deducted over the estimated effective with accredited suppliers, including for life of the asset. According to the lighting, heating, solar energy and other Commissioner’s estimates, solar hot water equipment. systems are depreciable at a slower rate

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Policy Brief - Tax and Energy

• In the Australian Capital Territory, ACT rate to the purchase by consumers of Smart provides rebates and subsidies household appliances and systems. A for households for air conditioning, reduced rate of Goods and Services Tax battery storage, solar installation, hot (GST) could be applied for energy efficient water heat pumps, replacement of old purposes or for solar or other renewable appliances, fridge buybacks, utilities energy sources. support, and an Energy Efficiency Alternatively, a tax could be levied on plant Improvement Scheme, as well as or equipment for businesses or households rebates for businesses. that does not use a renewable energy • New South Wales has established source or is less energy efficient. For energy savings scheme certificates in example, a higher GST rate could be its Energy Savings Scheme, providing applied to less efficient appliances. financial incentives for households and businesses to install energy efficient It would be important for policy makers to equipment and appliances. carry out appropriate cost-benefit analysis • Last year, Queensland provided a and policy design for any such targeted battery storage registration incentive, income tax concession for households, and is currently running a trial for which may have wider efficiency and landlords and tenants to install solar redistributional effects or add complexity to photovoltaic (PV) systems. the tax system. Experience with the solar feed-in tariff demonstrates that there are A full list of State and Territory rebates and pros and cons of this kind of subsidy, with programs is available here for households potential efficiency and equity and including and diverse programs for consequences. There are also business energy efficiency (every State disadvantages in moving towards multiple and Territory); feed-in tariff schemes; and rates or additional concessions in the GST. household incentives for energy-efficient Administration and compliance costs may systems and appliances. be substantial and there may be Policy options unintended consequences. Subsidies may be better delivered as direct grants or price Policy option 4. Explore an income tax regulation than in the tax system. deduction or offset to incentivise home owners or businesses to invest in Policy option 5. Explore an income tax equipment that utilises renewable deduction or offset to incentivise energy or is more energy efficient landlords to upgrade to renewable- energy based or energy efficient One policy option is to provide a tax equipment incentive to use renewables such as solar energy, or to adopt energy-efficient A more targeted policy option focused on equipment in Australian households. A tax the household sector is to provide a tax concession for the cost of such an incentive to landlords deriving rental investment could be designed as an income, to upgrade energy efficiency or income tax deduction or offset for invest in renewable energy-based households or businesses in the income equipment in rental investment properties. tax. The GST applies at a standard 10% Australian owner-occupied households

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Policy Brief - Tax and Energy

have relatively high take up of solar energy against the proposal. Evidence was and hot water supplies, but rental provided to the Committee that the majority properties are lagging behind. of rental properties have zero or low energy efficiency and much rental housing stock is The proportion of people living in private of poor quality. rental housing rose from 23% to 28% between 2001 and 2016 (according to the Policy option 6. Explore a stamp duty HILDA survey). Rental housing will concession for homes with higher become more important over time. energy efficiency (star ratings) Research by the Australian Housing and Stamp duty is a State tax payable by the has Urban Research Institute (AHURI) purchaser when purchasing real estate. found that private rental housing is the Australian studies have found that second largest tenure after owner properties that achieve a 7-star energy occupation, and Parliamentary research efficiency rating can sell for up to 9.4% finds that the proportion of households more than an equivalent 3-star home. living in owner-occupied dwellings has Where stamp duty increases with the value declined. of the property, this may represent a tax An example of a proposal to create a rental disincentive for more energy efficient property energy efficiency tax offset was homes. introduced in Treasury Laws Amendment A specific State tax measure to support (Improving the Energy Efficiency of Rental energy efficiency or renewable energy use Properties) Bill 2018. The Bill sought to could be implemented such as a discount amend the ITAA97 to introduce a new or offset for stamp duty on purchase. energy efficiency tax offset for landlords. Concessions could also be considered in Landlords would be eligible to claim the tax local government or council rates, or for offset of up to $2,000 per year during a land tax purposes, for residential or three-year trial period, for energy efficiency commercial property that meets a suitable upgrades to certain rental properties energy efficient standard. leased at $300 per week or less. As for other tax concessions, introduction The Bill aimed to reduce the so-called 'split of any additional concession should be incentive' between landlords and renters, evaluated fully with reference to efficiency where tenants do not have the resources and equity effects. More generally, the or ability to invest in energy efficiency structure of State taxes on land and improvements, while landlords –who do housing should be reformed as a matter of not directly experience the benefits of tax and housing policy (see Policy Brief 3). improved energy performance– have little The proposal of a concessional for stamp incentive to invest in these improvements duty is independent of considerations of for their tenants (it would not apply to the desirability or efficiency of residential owner-occupiers because it is not an stamp duty relative to alternative policies investment expense). The Senate such as land tax. Committee report (2019) on the Bill ultimately recommended against the reform but noted various arguments for and

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Policy Brief - Tax and Energy

Transportation improving incentives for the use of cleaner energy sources in general, in Australia. It was noted in Policy Brief 1 that the market share of electric vehicles in Policy option 8. Explore federal or State Australia is small, with 0.2% of purchases tax concession for use of public in 2017. Of these, businesses bought 63%, transport and remove income tax and private buyers purchased 34% and the Fringe Benefits Tax concessions for government bought the remaining 3%. cars Australia has no special income tax rules to Commuting between home and work is support take-up of electric or energy considered private travel, and these efficient vehicles, bicycles or other forms of expenses are not eligible for an income tax energy efficient transportation, and to deduction. An alternative to incentivise a create disincentives for “gas guzzlers”, shift towards more sustainable apart from the fuel taxes described above. transportation could be a tax deduction or In general, the GST applies at a flat rate of credit for the use of public transportation. 10% (1/11 price-inclusive rate) to all Employers could be provided with an vehicle purchases. exemption from Fringe Benefits Tax for Policy options public transport subsidies and in addition, Fringe Benefits Tax concessions for the Policy option 7. Explore federal or State provision and use of cars and car parking tax concession for equipment used to should be wound back (see Policy Brief 1). charge electric vehicles Such an approach is adopted in some An income tax deduction, tax offset or countries. Canada, for instance, had a accelerated depreciation could be provided public transit tax credit until June 2017. It for the cost of equipment purchased by a was a 15% non-refundable tax credit household and used to charge an electric available to an individual in respect of the vehicle, such as solar panels, battery cost of eligible transit passes, with the storage or charging equipment. A option to include transit passes from the depreciation or expense deduction would individual’s spouse or common-law partner already be available for a landlord to invest or children under 19 at the end of the in such equipment. taxation year. In the Netherlands, the use Policy Brief 1 identified several policy of public transport can be a deductible item options to support adoption of electric in social security contributions (public vehicles, including modifying the luxury car transport commuting allowance; fixed tax to provide a greater incentive for annual amount for commuting by public electric vehicles (Policy options 9 and 10). transport relating to earning employment It is important to consider the revenue and income). equity implications of these measures – A similar scheme has been proposed in since those on higher incomes are most Australia by national organisation, Bicycle likely to be able to afford electric vehicles– Network. It has suggested paying and the choice of energy sources. There Australians $5 every time they ride a bike remains a compelling argument for to work, to incentivise people to lower their

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Policy Brief - Tax and Energy

use of cars, reducing the demand for fossil as those originated by business (for fuels and congestion in urban areas. instance, business air travel not otherwise necessary, such as short meetings that Air travel and freight in a post-COVID could be done electronically). world The OECD and the International Transport As noted in Policy Brief 1, tax policy may Forum (2015) found that international be used to increase the price of consuming trade-related freight transport accounts for goods and services for carbon producing around 30% of all transport-related CO2 sectors, through levying a tax (or emissions from fuel combustion, and for increasing the tax) on consumption. In more than 7% of global emissions. Australia, taxes on consumption are low relative to other OECD countries. As an alternative, the measure could also take the form of emissions offsets for air or Although the effects of COVID-19 on the cruise travel, since consumers have shown travel industry are yet to be determined, the a more positive response towards offsets devastating 2019-2020 bushfires than taxes. evidenced the possible future impacts of climate change in Australia. In the wake of the pandemic, the United Nations has exhorted governments to ‘build back better’ systems that take into account the wellbeing of the population and the environment. The policy options in these briefers aim to be useful pointers in this endeavour. They also coincide with the strategies outlined by the International Monetary Fund towards sustainable, resilient economic recovery post COVID- 19: governments should mandate climate commitments when providing financial support to industry, promote green finance, and put the right price on carbon.

Policy options Policy option 9. Increase GST on non- essential personal air travel and international air and sea freight emissions and waste In the future, environmental taxes or levies on air travel (such as Sweden’s Airline Passenger Tax), cruise tourism and air and sea freight may be suitable measures to curb the related energy and fuel use and individual greenhouse emissions, as well

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Policy Brief - Tax and Energy

‘The Renewable Energy Target (RET) REFERENCES scheme’. (All links as at 3 May 2020) Australian Government Department of the Environment and Energy (2019), ‘Australian Energy Update 2019’, ACT Government (2015), Review of the September. Electricity Feed-in (Renewable Energy Premium) Act 2008, Environment, Australian Government Department of the Planning and Sustainable Development Environment and Energy (2019), Directorate, August. Australia's Emissions Projections 2019, December. ACT Government, 'Rooftop solar', Environment, Planning and Sustainable Australian Energy Market Operator (2020), Development Directorate. ‘Renewable Integration Study: Stage1 report: Enabling secure operation of the ActewAGL, ‘Renewable Energy NEM with very high penetrations of Generation’. renewable energy’, April. Australia’s Future Tax System Review Australian Energy Regulator, 'Annual (Henry Tax Review) (2009). volume weighted average spot prices'. Australian Bureau of Statistics (2014), Australian Government (2019), Budget Environmental Issues: Energy Use and 2019-20. Conservation, March. Australian Government, ‘Your Home: Australian Bureau of Statistics (2019), Australia’s guide to environmentally Australian Environmental-Economic sustainable homes’. Accounts 2019, July. Australian Senate (2019), Select Australian Council of Social Service & Committee on Electric Vehicles Report, Brotherhood of St Laurence (2019), January. Affordable, clean energy for people on low incomes, February. Australian Senate (2019), Treasury Laws Amendment (Improving the Energy Australian Government Department of Efficiency of Rental Properties) Bill 2018, Industry, Science, Energy and Resources, Environment and Communications ‘Energy supply’. Legislation Committee, February. Australian Government Department of Australian Taxation Office (2017), Income Industry, Science, Energy and Resources, tax: deductions for mining and petroleum ‘Rebates’. exploration expenditure, Taxation Ruling Australian Government Department of TR 2017/1. Industry, Science, Energy and Resources, Australian Taxation Office (2019), ‘Guide to ‘Renewable power incentives’. depreciating assets 2019’. Australian Government Department of Australian Taxation Office (2019), Rental Industry, Science, Energy and Resources, properties 2019.

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Policy Brief - Tax and Energy

Australian Taxation Office, ‘Income and Australians with their next energy bill’, deductions – Travel between home and Media Release, 30 March. work and between workplaces’. Fuerst, F & Warren-Myers, G (2018) 'Does Bicycle Network (2019), Pay Australians to voluntary disclosure create a green lemon Ride to Work, April.. problem? Energy-efficiency ratings and house prices', Energy Economics, vol. 74, Bloomberg NEF (2019), The Clean 1-12. Technology Fund and Concessional Finance: Lessons Learned and Strategies Government of Canada, ‘Public Transit Tax Moving Forward, February. Credit’ Brooklyn Microgrid. Hall, A (2017), ‘Trends in home ownership in Australia: a quick guide’, Parliament of California Public Utilities Commission Australia, 28 June. (2012), Electricity Use and Income: A Review, Policy and Planning Division Hardisty, DJ, Beall, AT, Lubowski, R, Literature Review, June. Petsonk, A & Romero-Canyas, R (2019), ‘A carbon price by another name may seem Clean Energy Council (2020), ‘Clean sweeter: Consumers prefer upstream Energy Australia Report 2020’, April. offsets to downstream taxes’, Journal of Climate and Energy College (2017), NDC Environmental Psychology, vol. 66, 1-8. & INDC Factsheets, The University of Henry Review, see Australia’s Future Tax Melbourne. System Review CSIRO (2017), Residential Air-conditioner Income Tax Assessment Act 1997 (Cth). Use Behaviour & Building Performance Analysis, June. International Energy Agency (2020), ‘Global Energy Review 2020: The impacts CSIRO (2018), ‘Australia’s changing of the COVID-19 crisis on global energy climate’, State of the Climate 2018. demand and CO2 emissions’, April. CSIRO (2018), GenCost 2018: Updated International Monetary Fund (2020), projections of electricity generation ‘Managing Director’s Opening Remarks at technology costs, December. the Petersberg Climate Dialogue XI. De Sadeleer, N & Godfroid, J (2020), Opening Remarks by Kristalina ‘COVID-19 is an Environmental Crisis Too’, Georgieva’, 29 April. Australian Institute of International Affairs, International Renewable Energy Agency 6 April. (2020), ‘Global Renewables Outlook 2020: Energy Transitions Commission (2018), Energy Transformation 2050’, Abu Dhabi. Mission impossible: Reaching net-zero Mak, J (2008), ‘Taxing cruise tourism: carbon emissions from harder-to-abate Alaska’s head tax on cruise ship sectors by mid-century, November. passengers’, Tourism Economics, vol. 14, Frydenberg, J & Fletcher, P (2019), ‘One- no. 3, 599–614. off energy payment to help 3.9 million

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